Hot Stock: ConAgra Foods

Invest in Chef Boyardee


With many investors flocking to the consumer staples sector over the last year, it’s getting harder to find good opportunities, especially in Canada. There is one company, though, that would fit in well with any portfolio: Omaha’s ConAgra Foods (NYSE: CAG).

This food operation is behind many well-known brands, including Chef Boyardee, Orville Redenbacher’s, Pam and Hebrew National, but it also sells foods and ingredients to commercial customers.

Because it’s in the food business, and people need to eat, it can survive in most market environments. For instance, while it’s stock price fell during the recession, it didn’t plummet nearly as much the S&P 500. It’s also rebounded nicely since then, climbing 70% between Mar. 6, 2009 and today.

While it will never be a high-flying stock—most consumer staples companies aren’t—some analysts say it should see good growth over the long-term.

Thomas Graves, an analyst with S&P Capital IQ, has a “strong buy” rating on the stock and is excited about ConAgra’s purchase in January of Ralcorp Holdings, a leading player in the private brand packaged foods industry. The company makes food for Costco and Trader Joe’s among other places.

“ConAgra’s strategic move toward private label products offers a potential long-term opportunity and we look for (the company) to have relatively little competition between its private label portfolio and its own branded products,” he wrote in Apr. 20 report.

However, the company won’t fully realize the merger’s benefits until next year. “We expect the Ralcorp purchase to be a primary growth driver in fiscal year 14,” he writes.

The company recently announced that first quarter earnings came in below estimates and it thinks its second quarter earnings will be lower than expected as well. While that’s worrying some investors—the stock has fallen about 3.2% since Sept. 16—Jack Russo, an analyst at Edward Jones, still thinks it’s a good long-term buy.

He too says the Ralcorp purchase will boost the company’s sales and earnings growth over the next year. The deal will also help it improve its supply chain and reduce overhead, he wrote in a Sept. 10 report.

Russo points out that the stock trading at around 13.7 times fiscal 2014, which is attractive, he says. “(That’s) below the packaged food peer average and well below the consumer staples peer average of 17 times,” he writes. He thinks valuations will increase once the benefits of the Ralcorp deal become clear.

He predicts the company will increase earnings by about 6% between 2014 and 2015, while Graves says it can boost earnings by 9% over the next fiscal year.

The stock is currently trading at about $30, Graves says thinks it can hit $38 over the next 12 months. Other analysts say it could even reach $42.

The stock could be somewhat volatile over the next few months, but this business, like most consumer staples companies, is definitely more of a long-term play. After all, who doesn’t want a bag of popcorn or a juicy kosher hot dog?